Constraints to the effective development of the entrepreneurial capability and performance of African public enterprises

LIMITED

UNITED NATIONS E/ECA/PAMM/PS/82/5

20 October 1982

ECONOMIC AND SOCIAL COUNCIL original: English

ECA/OAU Regional Conference on the Role of the Public Sector in National

and Regional Development in the context

of the Implementation of the Lagos Plan

of Action

Addis Ababa, Ethiopia, 22-27 November 1982

TO THE EFFECTIVE DEVELOPMENT OF THE ENTREPRENEURIAL

™ PERFORMANCE OF AFRICAN PUBLIC ENTERPRISES

by

ECA Secretariat

E/ECA/PAMM/PS/82/5

Constraints to the effective development of the entrepreneurial capabilities and performance of

African Public Enterprises

1. Introduction

Since the attainment of independence, African governments have been making increasing use of their public enterprises to promote development in the national economy. The scope of these enterprises, often referred to as parastatals, their numbers, variety and complexity of operation has in like manner increased considerably over the years. Today, public enterprises operate in virtually all sectors of the economy - agriculture, banking, commerce and industry, insurance, transportation, tourism and mining and it would appear that the corporate form of conducting public business has now become a permanent feature in all African countries.

Exact and up-to-date figures of public enterprises in Africa are hard to come by particularly as there does not appear to be any consensus among African countries

as to what precisely constitutes a public enterprise; indeed what may be regarded as a public enterprise in one country may hot be so regarded in another country. For the purpose of this paper, public enterprise or parastatal refers to institutions or organizations which are wholly owned by the public or in which the public holds a majority interest, whose activities are of a business nature and which provide services or produce goods and have their own district management. This definition would excludes organizations like Sports Councils, University Councils, Hospital

Boards, etc. and appears to be in line With UN General Assembly resolution No. 3488(XXX)

of 12 December 1975 in which the Secretary-General was requested to prepare a study on the role of the public sector in enhancing the development of developing countries.

It was specifically stated in the resolution that the study should focus "on those entities producing traded goods and services which the government and its agencies own and control (including partial ownership) if this is sufficient to give effective control " ]/.

Reverting to the question of numbers, a few examples may suffice to illustrate the proliforation of these institutions in African countries. Before 1966, there were four development corporations in Nigeria each of which had nearly forty subsidiaries;

in addition there were other Federal and State owned companies making a total of over 250. 2/,. It is conservatively estimated that today these figures have increased more than ten-fold.

In Kenya there are about sixty six parastatals and country-wide co-operatives;

this figure does not include government owned companies or the subsidiaries of parastatals, Parastatals are now a major factor in the sphere of employment. Indeed it is estimated that Kenyan parastatals now employ as many people as the civil service itself, if

1/ UN-Economic and Social Council Doc. E/5985 of 24 May 1977.

2/ S.G. Odia - Personnel Management Problems of African Public Enterprises

paper submitted to the ECA Regional Seminar on Technical and Managerial Problems of African Public Enterprises, Yaounde, 7-14 August 1978, .'.,.';.

Page 2

teachers are excluded. 3/ In the United Republic of Cameroon, the state owned Socigte Nationale d'Investissement (S.N.I.) alone has about 83 public enterprises and

subsidiaries with foreign and national entrepreneurs and provides, among other things, guidance to prospective investors. In Zambia the government makes nearly all its

investments in industrial and commercial undertakings through the Industrial Development

Corporation and its subsidiary companies, Zambian parastatals provide over-all

employment to about 140,000 workers, or 30% of the national work force in formal employment. The value of the total assets of Zambian parastatals at the end of 1976 was K3026 million; this figure had risen to K3451 million by 1977 4/. When all these .

issues are brought together.and. viewed as a'whole, there is little doubt that the

contribution of the parastatal sector in the economy of African countries is now a major factor to reckon with.

2. Role and Functions of African Public Enterprises

The ,degree and extent of government involvement in economic ventures through public enterprises is generally determined by ideological considerations, historical

factors and,the state of economic, development, Thus in countries which operate

socialist type economies, the general pattern appears to be one of elimination or

substantial reduction of the private sector. On the other hand in capitalist oriented , economies, public enterprises appear to be concentrated in the traditional and well established fields of public utilities as well as the so-called "commanding heights of the economy" leaving a substantial proportion of activities in other fields to private enterpreneurs. Whilst in the majority of cases the main criterion for the establishment of public enterprises is multidimensional a major rationale for their creation is to gain control of key sectors of the economy in order to play an effective

role in the economic and social development of the country.

Proliferation of public enterprises has also occurred in response to an absence or weakness of entrepreneurial class and lack of adequate domestic sources of private

capital for investment. 5/ As a result, African governments have now become either sole or part owners.of entrepreneurial, ventures such as iron and Steel complexes,

petrochemical plants, cement factories, petroleum refineries, textile mills and

breweries. Others are running air and shipping lines as well as bus services. These institutions are expected, among other things, to generate profits and surpluses to be ploughed back into the economy to expand production i.e. they are expected to build up capital for re-investment and must therefors operate on strictly business lines.

The entrepreneurial role of African public enterprises is therefore a very crucial

are in.the bid to attain accelerated, self-sustaining and mutually reinforcing economies

all over the continent.

3/ Report and Recommendations of the Committee appointed by His Excellency Hon. Daniel

~ Arap Moi, President of the Republic of Kenya to conduct a review of Statutory Boards,

Government Printer Nairobi, p.2

4/ Republic of Zambia - Third National Development Plan 1977-83. Government Printer

Lusaka, p.415,. , ■■.■■■■ .

5/ Changes and Trends in Public Administration and Finance for Development - Second

~ Survey - 1977-1979. UN Publication Sales E."82 11.H.T.sT7eSA/SER.El/27 p,5

E/ECA/PAMM/PS/82/5

Page 3

able £?Mf S. them ojvthe capital market. On the whole they have not been deal effectively with unemployment problems and income disparities. *

the Svate

'IIS rating of 23%betig that of

interference -tn SJ ? '^ off!cials as wel1 •« ™f^r and UmSLt^

interfereace. xn their affairs by politicians. Indeed as one report succintly points nS>table exceptions, there is clear evidence of inefficiency

^fSSffi'K ^f malpractices in many parastatalS.FurSore, the.confusionwhich exists, it is becoming increasingly difficult to

f°r ^anvier or waste lies and tte?e is I growing

others when things go wrong. A cSed

^ :-!v40 resist public

t0 the

E/ECA/PAMM/PS/ 82/5

3. Constraints inhibiting; effective performance

the constraints underlying the failures and difficulties of. African public enterprises are maijyvvaried and complex and can hardly be dealt with in their entirety art a pa_pQr'of this nature*; ^Furthermore even though many of the problems are basically the same,, the.re are variatioiis from country to country as well as between different sectoral public enterprises. A few critical constraints are Outlined below a^id they are illustrative rather than exhaustive,;;.Broadly speaking,

these constraints are of a dual nature i.e. those that relate to the environment in which the; enterprise operate and are by and large beyond its control; secondly there are those constraints inherent within the organization itself ie. internal

constraints. * . .,,, ,....; I

(a); External Cons traints .' ■ : — >^

; The current world situation coupled with the inexorable pace of modem technology as well as the increasing complexity of global economic and monetary

systems, provide ardynamic and extremely volatile background in which public enterprises operate. The current world recession, the fall in commodity prices as well as the protectionist tarrifs and other measures adopted by developed countries inevitably affect produce marketing boards and mining companies which are no longer able to

operate economically and are compelled to reduce their work force. The heavy debt" ']>>

burden which many African countries have had to bear compounded with other monetary problems has resulted in-an' acute shortage of foreign exchange so that many public L enterprises are unable to import vital equipment and spare parts from abroad. In :t ;

consequence some enterprises have been compelled, through contractual arrangements

to procure inappropriate technologies, absolete plant designs and equipment from foreigners who either wanted to exploit or were unfamiliar with local conditions and circumstances;. the results have, to say the least been catastrophic. These and other factors underlie the urgency for Africa to minimize its dependence on external sources and foreign agents, for the evolution of a strategy based on the principle of self- reliance and the use of indigenous raw materials and other factor inputs to produce goods and services needed for local consumption^

(ii) For either political or social reasons there has been an implanned and unco-ordinated proliferation of public enterprises in African countries. The goals and functions of some of them are not clearly defined and even conflict in certain cases. This has resulted in jurisdictional conflicts, duplication of efforts, and disipation of scarce resources. This situation has in addition created formidable problems of planning and control. In particular there has been insufficient clarity regarding the distinction between social welfare and economic goals of certain

enterprises.

Many public enterprises;.haVe..i. Weak financial base; others have been saddled with

responsibilities far ih'excess of available resources. In fact undercapitalization'

has been a major constraint of several African public enterprises. Accumulated loses

and the reluctance or inability of share-holders including government to incre^e;share

capital have created a_mbsi.liihsatis factory^ financialvposltioh/ V .:! r:

E/ECA/PAMM/PS/82/5

... ■'■■',' '■.'■"'-.' . . Page 5

. The financial guidelines q£ some enterprises are in some cases hot well spelt out;

there should be a clear indication as to when the enterprise should,cover its costs and when it should begin to make profits, > including rates of return. The procedure

for obtaining government, grants is often quite protracteci while borrowing powers^ may be limited and circumscribed. Most credit institutions insist on government guarantees

for loans. Since most governments generally provide an upper limit to their guarantee, this naturally restricts the number of public enterprises which can obtain such loans.

Thus a carefully developed programme of a financially viable enterprise may be starved of funds msrely because it joined the queue at the wrong time. Indeed even the right to dialogue with lending .institutions must on ocassion be foregone because another

enterprise or agency had previously opened negotiations with the leading institution, 8/

Closely allied to the problem of capital is the issue of pricing. Some African governments quite often arbitrarily andunilaterally fix or alter prices of goods and

services for: social or political reasons. As a result, several enterprises are compelled to charge.uneconomic prices for goods and services which bear very little

relationship,to increases in the cost of production* The pricing mechanism in Africa has been used as a, political weapon and is generally introduced at the most expedient period which may not necessarily correspond with the most economically judicious pieriqcL

(iii) Another type of major constraint confronting African public enterprises relates to the issue of authority to operate and this involves the level of political control as well as the degree of autonomy they should be accorded. The issue of autonomy vis-a-vis control is a very thorny one and many African governments have so far not

been able ?to-strike a balance between the two. Indeed as a UN Expert Group meeting;,

pointed out recently:

11 >. ..although it is the legitimate function of governments to provide / over-a^ policy direction to and co-ordinate the activities pf public enterprises,

in general the control exercised by governments is excessive, extensive aridrigid..

This control often extends,.inter alia to the appointment of top managers, pricing policies, project evaluation, levels of investment and sources of financing ...

wage policies, industrial relations including every day (current) production management and expenditure it is not uncommon for political

considerations to out weigh objective considerations... Complex and time- consuming processes adopted for project evaluation and for.financing have

eventually resulted in cost over-runs and delays in implementation "9/.

If parastatajs are to discharge their functions effectively they have to be fairly autonomous and should be given enough latitude to take decisions within the overall policy laid down by government and the requirements of the national development plan.

8/ Marshall Hall - Some Management Problems in Public Enterprises Paper prepared

~ for CAFRAD Seminar Organized with the Government of Kenya November/December 1976.

9/ Report of the Sixth Meeting ojg Experts on the UN Programme in Public Administration and Finance, Geneva, 10-19 March 1982, Doc. E/1982/52/Add.l page 23. -..•■■

Page 6

They are seldom allowed to do so. To aggravate matters many parastatals are saddled

with Boards of Directors often appointed for political reasons instead of competence, business acumen or other relevant experience which tend to become a liability to the enterprise. Usually there is friction between the board and the top management as well as between the latter and the supervising ministries including undue interference in the day to day affairs of the enterprise. Such interference often has its roots in the lack of proper understanding as to the nature or relationship between the enterprise and government and has crippling effects on productivity.

(b) Internal Constraints

(i) Inefficient management ,

African public enterprises are plagued with multifarious managerial problems ranging from organizational and operational issues, low capacity utilization, poor project appraisal, lack of skilled manpower as well as faulty procurement and supplies management systems. Because many public enterprifies grew out of government departments, there has been a tendency to model them on government departments and to saddle them with civil service rules and procedures which are generally unsuitable for business ventures. Work procedures are often cumbersome, chains of command obscure and work distribution uneven. Such a situation naturally emasculates initiative, dampens enthusiasim and affects productivity. This is particularly the case with rules xor

financial control which should be more in accord with operational practices related

to business circumstances.

It is not unusual to find in the public enterprises of many African countries,

complete lack of provision for planning, research arid development. Comprehensive corporate planning is lacking. Resource allocation is often based on generalized

estimates rather than detailed costing; needless to sax that such an unrgalistic approach can result in unforseen shortages of critical inputs caused by faulty resource budgeting practices. Poor planning has also resulted in low capacity utilization of plant or even in capacities which are in excess ot foreseable needs. Indeed many African public

enterprises embark on projects with inadequate or hardly any feasibility studies; often there is a complete absence of market research for tlie product or service of a new venture. Research is equally vital in identifying production constraints and for planning .new products, services and related investments *

(ii) Human Resource Development

Many:African public enterprises suffer from an acute shortage of skilled, trained and qualified manpower. This deficiency is both quantitative and qualitative arid is particularly critical at the top and middle levels. Naturally this affects effective performance and productivity. Indeed Iqw p^4uctivii:y; is a common characteristic of many African public enterprises:. Productivity depends on the optimum combination an4 development of human, capital arid natural resources8 Human resources are crucial as they form the fulcrum on which everything else devolves; they are the key for the

unlocking and mobilizing the other resources and must therefore be fully and effectively developed and utilized if productivity goals are to be realized. 10/

10/ Promoting Productivity through Motivations Staff Paper presented by

Professor Robert Abramson to the Seminar for Management Personnel in Parastatal

Organizations, Mombassa - Kenya 28 Nov.-11 Dec. 1976 organized by CAFRAD in collaboration

with the Government of Kenya, p.3

E/ECA/PAMM/PS/82/5 Page 7

Staff development policies in African public enterprises are either inadequate, non-existent-or dealt with in an ad'hoc manner, This is a very serious constraint.

Comprehensive policies should be introduced as a matter of urgency and should be

geared towaxds-the full developmeAt and growth of human resources* to enable, the f: _ staff to utilize their capacity fully and apply their knowledge and Experience to enhance productivity'. 'Personnel administration is a key factor in this regard and . should be oriented to motivate staff. This can b©..; achieved by- fair *6cruxtraent , . policies, promotions and realistic job descriptions for each post.,'/These policaes v should incorporate a clearly defined programme, allowing for performance improvement through job-related training; the latter shauld be matched by satisfactory and relevant placement to ensure optimum performance. In a nut-shell, African public enterprises need to embark on a programmed investment in manpower development.

(iii) Problem Solving Capabilities

Many African public enterprises lack the internal capability of identifying and analysing their own problemsj decision-making skills are inadequate and consequently they rely to a great extent on external consultants to diagnose managerial problems and devise appropriate renedial measures instead of developing self-reliance and

strengthening their own internal problem-solving capability. Apart from the high cost involved in paying for external consultancy services, especially those from abroad quite often the solutions proposed have proved impracticable or irrelevant. It is felt that self-reliance should be encouraged by improving in-house capabilities of internal consultancy systems. This can be reinforced by the installation of adequate management accounting and operational control systems as well as nechamsms for

measuring costs against performance and productivity including performance appraisal

and evaluation systems.

4. Conclusion

Africa has the unenviable reputation of being the least developed of all the developing regions of the world. It has the lowest income per head of population, the

lowest literacy rates as well as the largest nuubcr of land locked and island countries.

Thirteen African countries have per capita incomes of less than $200 per annum; twenty three between $500 and $2000. Between 1960 and 1980 the rate of economic growth was only an average of 4.8%. Many African countries are today confronted by acute economic problems and find it difficult to organize their planning requirements on a rational basis. Many of them are too small to sustain viable economic activities and without economic and technical co-operation very little can be achieved single-hardedly by the majority of African States. The region therefore needs a strategy that will reflect its own social and economic realities and which would facilitate accelerated selr-

sustaining growth and development.

Indigenous entrepreneurship, both public and private are critical in the attainment

of economic self-reliance and national prosperity; indeed both should enjoy a symbiotic

relationship. In view of the constraints confronting private indigenous entrepreneurship

including shortage of capital, shortage of skilled manpower and lack of modem business

acumen, it is obvious that public indigenous entrepreneurship will have to play the

Page 8

predominant r6)Le in the development effort. This paper attempts to high light some

of the constraints to the effective development of that entrepreneurship. As pointed

out earlier, the constraints outlined in this paper are far from exhaustive but it

is hoped that they will form a basis for discussion by participants. The paper does

not attempt to propose remedial measures except in a few instances, as these are adequately dealt with in other papers presented to the conference.